Canada: SME Growth Stock Plan Revamped: Quebec Stock Savings Plan II

Originally published in Blakes Bulletin on Corporate
Finance & Securities Regulation, March 2009

In its 2009-2010 budget (the Budget) tabled on March 19, 2009,
the Quebec government announced that it would revamp and enhance
the SME Growth Stock Plan (SME Growth Plan), rechristened the
Quebec Stock Savings Plan II (QSSP II), in an effort to stimulate
investment in Quebec-based companies by providing greater income
tax incentives to investors.

Among the changes highlighted in the Budget, the asset-value
threshold of corporations whose shares qualify for inclusion under
the plan (Qualified Issuing Corporations) has been increased, the
minimum hold period in respect of Qualifying Shares and Qualifying
Securities (as hereinafter defined) has been reduced, the process
for registering replacement shares as Valid Shares (as hereinafter
defined) under the QSSP II has been streamlined, and the tax
benefits to investors in Qualified Issuing Corporations has been
increased temporarily.

BACKGROUND

The QSSP II is the successor to the SME Growth Plan introduced
by the Quebec government in 2005. Under the SME Growth Plan, a
resident of Quebec may deduct from his taxable income for the year
the adjusted cost of a Qualifying Share or a Qualifying Security
acquired during such year, provided it is included in his/her SME
Growth Plan by no later than January 31 of the following year, with
the entire taxable income subject to a maximum deduction of 10% of
the individual's total income for the year.

Three categories of securities are qualified for investment
under the SME Growth Plan: (i) non-redeemable common shares with
full voting rights and no fixed dividend, acquired for cash as part
of a public offering by a Qualified Issuing Corporation under the
SME Growth Plan (Qualifying Shares); (ii) securities issued by an
investment fund that makes investments in Qualifying Shares that
are acquired for cash by an initial purchaser (Qualifying
Securities); and (iii) for transactions intended to replace
Qualifying Shares or Qualifying Securities withdrawn from the SME
Growth Plan (Covering Transactions), common shares acquired on the
secondary market that, had they been issued under the SME Growth
Plan, would be Qualifying Shares (Valid Shares).

In order to obtain the status of a Qualified Issuing Corporation
pursuant to the SME Growth Plan, a corporation must generally
satisfy the following conditions on the date of issuance of the
final prospectus receipt by the Quebec securities regulatory
authority, Autorité des marchés financiers (AMF), in
connection with the distribution or, if applicable, on the date of
reliance on any prospectus filing exemption:

(i) the corporation must be a Canadian corporation whose assets
aggregate less than C$100-million;

(ii) the corporation's central management must be situated
in Quebec, and more than one-half of the wages paid by the
corporation in the course of its last taxation year must have been
to employees of an establishment located in Quebec;

(iii) throughout the preceding 12 months, the corporation must
have carried on a business and had at least five full-time
employees, none of whom are insiders or persons related to
insiders; and

(iv) a maximum of 50% of the value of the corporation's
assets must consist of investments other than certain investments
prescribed by law.

The SME Growth Plan was scheduled to terminate on December 31,
2009.

ASSET LIMIT FOR AN ISSUING CORPORATION INCREASED TO
C$200-MILLION

For the purpose of calculating the asset-value threshold in
determining whether a corporation is a Qualified Issuing
Corporation, a corporation must include, in addition to those
assets shown in its financial statements for the year preceding the
offering of Qualifying Shares, the assets of any other corporation
with which it is associated, on a worldwide basis, at any time
during the 12 months preceding the time of the offering of
Qualifying Shares, less any borrowing, brokerage, custody and other
similar expenses associated therewith.

Under the QSSP II, the asset-value threshold of a Qualified
Issuing Corporation is increased from C$100- million to
C$200-million.This amendment applies in connection with a public
offering of Qualifying Shares for which a final prospectus receipt,
or prospectus filing exemption, as the case may be, is granted or
relied upon after March 19, 2009. The increased asset value
threshold will also apply in respect of a Valid Share registration
application made after March 19, 2009.

MINIMUM HOLD PERIOD REDUCED TO TWO YEARS

In order to preserve the tax benefit relating to the purchase of
Qualifying Shares or Qualifying Securities included in an SME
Growth Plan, investors are required to hold Qualifying Shares or
Qualifying Securities in their SME Growth Plan having a total
adjusted cost that is at least equivalent to the amount of the
deductions they claim under the SME Growth Plan for the three years
following the acquisition thereof (Minimum Hold Period). Generally,
if a Qualifying Share or Qualifying Security is withdrawn from the
SME Growth Plan, an investor may continue to satisfy the Minimum
Hold Period by purchasing a Valid Share in a Covering
Transaction.

In an effort to render an investment in Qualifying Shares and
Qualifying Securities issued under the QSSP II more attractive to
investors, the Minimum Hold Period has been reduced from three
years to two years. As a result, investors will satisfy the Minimum
Hold Period requirement under the QSSP II where they hold in their
QSSP II plan, on December 31 of the year of acquisition of
Qualifying Shares or Qualifying Securities as well as on December
31 of the two following years, Qualifying Shares, Valid Shares or
Qualifying Securities, the total adjusted cost of which is at least
equivalent to the amount of deductions claimed under the SME Growth
Plan over the preceding two taxation years.

This amendment applies as of January 1, 2009.

STREAMLINED REGISTRATION PROCESS

To satisfy the Minimum Hold Period obligations and ensure
permanent coverage in an SME Growth Plan, an SME Growth Plan
investor could purchase a Valid Share on the secondary market to
replace a Qualifying Share or Qualifying Security withdrawn from
the SME Growth Plan. A list of Valid Shares is published weekly by
the AMF (AMF List).

The AMF List includes the names of the Qualified Issuing
Corporations that have made an SME Growth Plan offering over the
preceding four years. A corporation that has not made a public
offering under the SME Growth Plan may apply for registration with
Revenu Québec as a Qualified Issuing Corporation by
requesting an advance ruling in order to be included on the AMF
List. The advance ruling will confirm that the corporation's
capital stock includes a class of shares listed on a stock exchange
in Canada that satisfies the criteria for being Qualifying Shares
and that at the time of the request, the corporation satisfies the
criteria for being a Qualified Issuing Corporation.

The QSSP II seeks to streamline the process for such
registration as a Qualified Issuing Corporation by replacing the
current cumbersome and complex advance ruling application procedure
with an application to Revenu Québec on a prescribed form.
The prescribed form must be signed by a director of the corporation
certifying that the corporation meets the conditions required to
qualify as a Qualified Issuing Corporation. The prescribed form
must be accompanied by a description of the corporation's
capital stock as well as its consolidated and non-consolidated
financial statements.

The foregoing streamlined procedure for inclusion on the AMF
List will apply with respect to applications submitted after June
30, 2009.

TAX BENEFIT INCREASED TO 150% FOR TWO YEARS

The adjusted cost of a Qualifying Share, a Valid Share or a
Qualifying Security represents the amount that must be used to
determine the tax benefit relating to the SME Growth Plan and for
the satisfaction of the Minimum Hold Period requirement.

Normally, the adjusted cost of a Qualifying Share or a Valid
Share, for an individual or an investment fund, is equal to 100% of
the cost of such share. However, the QSSP II provides that such
adjusted cost will be increased temporarily to 150% of the cost of
such share. Such increase will apply with respect to Qualifying
Shares and Valid Shares acquired after March 19, 2009, and before
January 1, 2011, and included in the QSSP II plan by no later than
January 31 of the year following their acquisition. Qualifying
Shares and Valid Shares acquired after December 31, 2010, and
before January 1, 2015 will be subject to the 100% rate.

EXTENSION OF THE PLAN

Finally, the QSSP II will apply for a period of five years,
ending on December 31, 2014, thereby extending the December 31,
2009 expiry date that was otherwise contemplated for the SME Growth
Plan.

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